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Mid-Cap

Why we think Graincorp is expensive

October 15, 2015 | Team Kalkine
Why we think Graincorp is expensive

Weak First half of 2015 performance:

Graincorp Ltd (ASX: GNC) reported a slight decline of revenues to $1,975 million in the first half of 2015, against $2,056 million in prior corresponding period (pcp). Oils revenues fell to $471 million from $476 million in 1H14, while the marketing division revenue also decreased to $917 million in 1H15, from $966 million in 1H14. Lower than the normal grain production in eastern Australia led to competition for grain as well as hurt margins. Moreover, other origination sources are competing strongly with Australian grain. As per the oils business, crushed oilseeds volumes and margins improved against the pcp but refined volumes remained steady at lower margins. High capacity utilization at the division’s liquid terminals is ongoing while extra support from two finished expansions added support to the oils division. With regards to the Storage & Logistics division, lower than the average carry-in and normal grain production in eastern Australia led to decrease in upcountry receivables, grain exports as well as rail freight utilization. On the other hand, the group’s malt business delivered steady levels of capacity utilization, while division’s strategic initiatives enhanced earnings. Positive foreign exchange movements also boosted the division earnings. Moreover, the segment witnessed a higher than estimated processing results from poor quality barley in North America. Meanwhile, strong commodity management was offset by volatile feed conditions in New Zealand dairy. Storage and logistics division revenue reduced to $209 million as compared to $280 million in 1H14. Accordingly, the group’s overall EBITDA fell to $136 million during the period from $166 million in 1H14, while statutory NPAT declined to $35 million in 1H15, against $61 million in 1H14. Graincorp reduced its a fully franked interim dividend to 7.5 cents per share, as compared to 15 cents in the first half of 2014. GNC made a refinancing of term debt for its new five year construction facility, prolonging the period to the range of 4.5 to 7 years during the first half.
 

First half of 2015 earnings performance (source: Company Reports)
 

Finalized Pre-Harvest Optimizer Product and expanding North American malt production capacity:

GrainCorp finalized the 14/15 Pre-Harvest Optimizer Product and the management reported that the product delivered outstanding performance, beating average contract prices in the commitment period by the range of $24 - $43/tonne. Moreover, the product also outpaced the average cash market price over the pool’s life by $16-$24/tonne. The group’s Pre-Harvest Optimizer was designed to offer protection in the pre-harvest marketplace. The group also launched Croptimiser, to enable its growers to leverage warehoused wheat deliveries to enhance the later loads which might miss a grade specification. Management believes that its grower customers would be able to develop solid buyer competition and pricing, as well as access to international and local markets through Croptimiser. Meanwhile, Graincorp is expanding its North American malt production capacity at its Great Western Malting facility in Pocatello, Idaho by 120,000 tonnes, leading to total capacity to 220,000 tonnes. Management is expanding the facility to support its long term supply agreements and demand from the long term customers. The craft sector in the US delivered a growth of over 10% to 15% per annum from past few years and might account over 20% of the country’s beer market in the next five years. The group intends to invest over $95 million for this project, with debt facilities divided consistently in FY16 and FY17. Project construction would start from the third quarter of 2015.


 

Stock Performance:

Graincorp estimates its EBITDA (before significant items) to be in the range of $240 million to $270 million during fiscal year of 2015, while expects its underlying NPAT (before significant items) to reach around $45 million to $60 million. The group estimates the eastern Australia crop production pressure to continue and accordingly issued a poor Carry-in of 1.9 mmt which is lower as compared to past few years and estimates the country receivables to be in the range of 7.0 to 7.5mmt in FY15 against 8.0mmt in FY14. Graincorp also estimates its Grain exports to decrease to 2.5–3.0mmt from 4.4mmt in FY15. Decrease in eastern Australia production volumes and intensifying competition from local market to originate grain would continue to hurt the firm’s marketing business performance. Although Graincorp rallied over 11.54% (as of Oct 15, 2015) in the last four weeks, we believe that it is trading at expensive valuations with a relatively high P/E of 67.09x. The share price rise along with the arrival of hot and dry weather seem to be unfavorable for this stock. Accordingly, we give “Expensive” recommendation at the current price of $9.02.


GNC Daily Chart (Source: Thomson Reuters)

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